Carriage Services, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Dollar amounts are in U.S. dollars.
Business context
Carriage provides funeral and cemetery services and merchandise in the United States. At year-end it operated 161 funeral homes in 26 states and 32 cemeteries in 10 states. Funeral operations generated about 75% of revenue and cemetery operations about 25%. Its decentralized Standards Operating Model and selective acquisitions are central to its strategy.
Financial results and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $214.0 million | $199.4 million |
| Gross profit / margin | $64.4 million / 30.1% | $60.1 million / 30.2% |
| Operating income | $37.0 million | $36.7 million |
| Net income from continuing operations | $15.2 million | $10.6 million |
| Net income, including discontinued operations | $19.3 million | $11.4 million |
| Diluted EPS, continuing operations / total | $0.82 / $1.00 | $0.58 / $0.63 |
| Cash flow from operating activities | $39.8 million | $25.8 million |
- Revenue rose 7.3%; gross profit increased 7.0%. Continuing-operations income grew 43.6%. Total net income included $4.1 million from discontinued operations, including a $6.1 million gain on business sales before related tax and other discontinued-operation items.
- Funeral revenue increased 7.9% to $164.0 million; cemetery revenue increased 5.5% to $50.0 million. Funeral same-store operating revenue was nearly flat (+0.2%) and same-store operating profit declined 2.1%. Cemetery same-store revenue rose 5.4% and operating profit rose 18.8%.
- General and administrative expense increased 15.2% to $25.9 million, reflecting corporate staffing and organizational upgrades, termination and consulting costs, and a securities transaction fee. Interest expense declined, aided by lower credit-facility rates and the absence of 2012 debt-extinguishment costs.
- Capital expenditures were $10.7 million. Cash ended the year at $1.4 million. Working capital was negative $11.5 million, with current assets of $36.1 million and current liabilities of $47.6 million.
- Year-end senior debt and capital lease/acquisition obligations totaled about $159.7 million; the separate 7% convertible junior subordinated debenture was $89.8 million, due 2029. The credit facility had $36.9 million drawn on a $125 million revolver and a $117.0 million term loan outstanding; its weighted-average rate was 3.2%. The company reported compliance with covenants, with leverage of 2.83x and fixed-charge coverage of 2.01x.
Fourth-quarter results
Unaudited fourth-quarter 2013 revenue was $52.9 million versus $52.1 million in fourth-quarter 2012; gross profit was $14.4 million versus $16.5 million. Continuing-operations income was $4.3 million versus $4.0 million, and diluted EPS was $0.22 versus $0.21. Net income available to common shareholders was $4.0 million versus $3.7 million.
Changes, outlook, risks, and unusual items
- Growth was driven substantially by acquired operations and higher trust earnings; one 2013 acquisition added two funeral homes for approximately $13.7 million. The company sold seven funeral homes and one cemetery for approximately $10.2 million in aggregate consideration.
- Funeral cremation rate increased to 46.8% from 46.1%; management noted lower average revenue per contract in same-store funeral operations and a declining share of cremations that included services. Preneed cemetery sales increased 10.8% year over year.
- No quantified earnings or revenue guidance is provided. Management said operating cash flow, cash balances, and credit-facility borrowing were expected to cover anticipated needs for the foreseeable future, while noting that changed acquisition or capital-spending plans could require capital-market funding. It planned annual capital expenditures of roughly $10–$13 million and intended to continue dividends.
- Management expects recurring trust-portfolio income to support future revenue as preneed contracts are fulfilled. Trust returns are exposed to market performance and interest rates; trust principal and earnings are subject to state-law restrictions and may not be freely available for corporate use.
- Key risks include competition and pricing pressure, increasing cremation and direct-cremation preferences, dependence on local leaders and sales staff, preneed sales and cancellation/collection risks, investment-market declines, guaranteed-service cost inflation, regulation and environmental liabilities, and debt-covenant restrictions.
- On January 3, 2014, the company cancelled outstanding performance-based stock awards for a cash payment of approximately $16.1 million. On March 3, 2014, it agreed to acquire funeral and cemetery businesses from SCI for $54.9 million. These are post-year-end items, not 2013 operating results.
- The company reported no goodwill impairment from its annual 2013 test, but recorded about $0.1 million of impairment for a location held for sale. It reported a $7.8 million uncertain-tax-benefit balance. A cemetery class-action matter remained in discovery; the company said it could not estimate a potential loss. Management did not expect ordinary-course legal matters to materially affect the financial statements.
Important facts for investors to verify
- How much of earnings and cash-flow growth is sustainable and organic, versus acquisition contributions, trust returns, and discontinued-operation gains?
- Whether same-store funeral profitability, average contract revenue, and cremation service attachment rates improve or continue to weaken.
- Trust-asset performance, restrictions, and the adequacy of assets for future price-guaranteed preneed obligations and cemetery care.
- Funding and covenant headroom after the $16.1 million award payout and the announced $54.9 million acquisition, including the impact on liquidity and leverage.
- Potential outcomes and financial exposure from the Grandview cemetery litigation, uncertain tax positions, and applicable regulatory or environmental matters.